On a regular basis we review the strategy and direction of businesses. It is not a financial analysis, but a review from a strategy perspective. In this blog we will review Virgin Australia (the domestic premium airline wholly owned by Virgin Holdings Ltd). Virgin is holding its own, but is it due to good strategy or is Virgin just lucky?

The Australian domestic airline industry has been a profitable market, not necessarily due to its size, which is quite small by global standards, but more because the number of competitors has historically been limited. Currently the premium end is serviced by Qantas and Virgin Australia, while the low cost niche is serviced by Jetstar and Tiger. Some argue that we have for many years really had a duopoly, and as both the low cost airlines are owned by the premium parent, this technically hasn’t changed.

Has Virgin Australia been lucky with its profit improvement or is it clever strategy? In my view it has been a bit of good luck in a big reduction in prices of inputs such as oil and a lack of competitive rivalry rather than great strategy. For example, recently Qantas and Virgin reduced capacity and airfares increased.

In the following analysis I rate their Mission (Purpose), Vision, Sustainable Competitive Advantage and their current strategic focus.

Business Mission /Purpose – Why do we exist?

The Mission/Purpose states the businesses reason for existence. It gives focus to the employees, customers and the wider market what a business does and doesn’t do.

Virgins Australia’s stated Mission (Virgin call it their strategic objective) is to “Become Australia’s best customer led organisation.”

If this is Virgins mission it is too broad, lacks focus and could apply to any organisation. Maybe a better one could be, “We ensure Australia travelers arrive at their destination safe and happy every time.”

What would that mean? – No delays, quality food, newest planes, happy staff and so on.

“Over the next three years, the Virgin Australia Group will focus on six key areas: capitalising on growth business opportunities, driving yield enhancement, implementing a new cost program, optimising the balance sheet, setting a new standard in customer experience and developing our people to their full potential”, (John Borghetti)

The Vision passes the “stickability” test. “To become Australia’s favourite airline group” is simple and memorable. It is something to aspire to.

What is Virgin Australia’s Sustainable Competitive Advantage?

This is where I think Virgin is lost. They started in Australia as the low cost airline. Their SCA was clear. They eliminated services such as meals and charged a lower price than Qantas. It worked well. Then Jetstar arrived, and Virgin was caught in Death Valley. They were dearer than Jetstar and so got caught in the middle. They were no longer the true “low cost” carrier, nor were they the full service airline which attracts the business market like Qantas. John Borghetti is trying to reposition Virgin as a premium airline, and if you look at their tactics, they have introduced business lounges and free snacks and meals on all flights to try and compete with Qantas. So what is the problem?

The problem for Virgin is getting Qantas customers to switch. With history from the low cost days still around such as Melbourne’s Virgin terminal (Which is very dated and looks like a low cost terminal) Virgin are sending mixed signals to the market.

Three way strategy test

I have a three way test to see if a strategy is working.

Is your strategy externally consistent? – Virgin is trying to show the Australian travellers that they are now a premium airline; however evidence suggests that externally they are inconsistent. For July for example their cancellations were higher than Qantas, and their on time departures were not as good as Qantas. Melbourne terminal for Virgin is very dated, and their “Free” meals and snacks are not on a par with Qantas. To really challenge Qantas, Virgin need be the best, otherwise why would travellers switch?

Is your strategy internally consistent? – This test is checking if internally, they are consistent to their strategy. That is working on the right issues, employees are consistent and processes are consistent. It appears that they are working on the right issues, but as an outsider it is hard to tell.

Is there dynamic consistency with your strategy? - This test is to see if the strategy fits with the ever changing external market place. Virgin is fortunate that Australia has a history in many industries of two major players. Think food retailing of Woolworths and Coles, Packaging, Amcor and Visy. Our small market size in many industries deters interest from new entrants to come into the market. At the premium airline end of the market we have Qantas and Virgin. There will always be room for two, and so Virgin should survive. However, like in the supermarket industry, if a new entrant like Aldi came in, Virgin could be more vulnerable being the weaker of the two airlines